1998 (3) TMI 138 - SC - Central Excise

Related person under Section 4(4)(c) requires direct or indirect interest; lifting the corporate veil depends on factual control inquiry

SC allowed the appeal, holding that 'related person' under Section 4(4)(c) requires direct or indirect interest between manufacturer and buyer and that ... Determine the assessable value for excise duty - applicability and interpretation of the 'identity of interest' test - Whether a person is a related person within the meaning of Section 4(4)(c) of the Central Excises and Salt Act, 1944? - authorities failed to prove any favorable treatment or lower pricing due to their relationship - Held that:- As to who is a related person, we have to see its definition of Section 4(4)(c) of the Act. It is not only that both, the manufacturer and the buyer, are associated with each other for which corporate veil may be lifted to see who is behind it but also that they should have interest, directly or indirectly, in the business of each other. But once it is found that persons behind the manufacturer and the buyer are same, it is apparent that buyer is associated with the manufacturer, i.e., the assessee and then regard being had to the common course of natural events, human conduct and public and private business it can be presumed that they have interest, directly or indirectly, in the business of each other (refer Section 114 of the Evidence Act). It is, however, difficult to lay down any broad principle to hold as to when corporate veil should be lifted or if on doing that, could it be said that the assessee and the buyer are related persons. That will depend upon the facts and circumstances of each case and it will have to be seen who is calling the shots in both the assessee and the buyer. When it is the same person the authorities can certainly fall back on the third proviso to clause (a) of Section 4(1) of the Act, to arrive at the value of the excisable goods. It cannot be that when the same person incorporates two companies of which one is the manufacturer of excisable goods and other is the buyer of those goods, the two companies being separate legal entities, the Excise authorities are barred from probing anything further to find out who is the person behind these two companies. It is difficult to accept such a narrow interpretation. True that shareholdings in a company can change but that is the very purpose to lift the veil to find out if the two companies are associated with each other. Law is specific that when duty of excise is chargeable on the goods with reference to its value than the normal price on which the goods are sold shall be deemed to be the value provided (1) the buyer is not a related person and (2) the price is the sole consideration. It is a deeming provision and the two conditions have to be satisfied for the case is to fall under clause (a) of Section 4(1) keeping in view as to who is the related person within the meaning of clause (c) of Section 4(4) of the Act. Again if the price is not the sole consideration, then again clause (a) of Section 4(1) will not be applicable to arrive at the value of the excisable goods for the purpose of levy of duty of excise. In the present case, we do find that the authorities of and the Appellate Tribunal did address themselves to the basic question as to the shareholdings of both, the assessee and the buyer, inasmuch as they found that the Managing Director of both the companies was the same and one more Director was common. In the present case, we are told that for subsequent years, the authorities have not treated M/s. Ganga Saran & Sons Pvt. Ltd., the sole distributor of the appellant, as a related person which fact has not been controverted by the respondent and have accepted the price at which the goods are sold by the assessee to the sole distributor as the sole consideration for sale. The matter pertains to the year 1976. Order of the Assistant Collector is of the year 1978. We do not think at this late stage any purpose will be served to inquire into the shareholdings of the assessee, the appellant and its sole distributor as directed by the Appellate Tribunal. We are, therefore, inclined to hold that no effect be given to the judgment of the Appellate Tribunal. Appeal allowed. Issues Involved:1. Whether M/s. Ganga Saran & Sons Pvt. Ltd. is a 'related person' under Section 4(4)(c) of the Central Excises and Salt Act, 1944.2. Whether the price at which the goods are sold by M/s. Ganga Saran & Sons Pvt. Ltd. should be used for determining the assessable value for excise duty.3. The applicability and interpretation of the 'identity of interest' test.4. The relevance of subsequent years' treatment by the authorities.Issue-wise Detailed Analysis:1. Whether M/s. Ganga Saran & Sons Pvt. Ltd. is a 'related person' under Section 4(4)(c) of the Central Excises and Salt Act, 1944:The Assistant Collector, Central Excise, and the Collector of Appeals both held that M/s. Ganga Saran & Sons Pvt. Ltd. was a related person to the appellant under Section 4(4)(c) of the Act. This conclusion was based on the fact that both companies were controlled by members of the Sharma family, who had significant shareholdings and common directors. The Appellate Tribunal upheld this view, emphasizing the 'identity of interest' between the two companies. The Tribunal remanded the matter to the Assistant Collector to consider the break up of the shares of each family member to confirm the identity of interest.2. Whether the price at which the goods are sold by M/s. Ganga Saran & Sons Pvt. Ltd. should be used for determining the assessable value for excise duty:The Assistant Collector levied duty based on the price at which M/s. Ganga Saran & Sons Pvt. Ltd. sold the playing cards, as they were considered a related person. The appellant argued that the companies were separate legal entities and that the authorities had failed to prove any favorable treatment or lower pricing due to their relationship. The Appellate Tribunal, however, held that the identity of interest was sufficient to use the price at which the distributor sold the goods for determining the assessable value.3. The applicability and interpretation of the 'identity of interest' test:The Appellate Tribunal referred to the Supreme Court's decision in Union of India & Ors. v. ATIC Industries Ltd., which clarified that for a person to be considered a related person, there must be mutual interest in the business of each other. The Tribunal found that the appellant and its distributor had such mutual interest, given their shared management and family control. The Tribunal also referred to other cases, such as Mohanlal Maganlal Bhavsar and Diamond Clock Manufacturing Co. Ltd., to support its interpretation of the identity of interest.4. The relevance of subsequent years' treatment by the authorities:The appellant's counsel argued that for subsequent years, the authorities did not treat M/s. Ganga Saran & Sons Pvt. Ltd. as a related person, which should be considered in the present case. The Supreme Court acknowledged this point, noting that the authorities had accepted the price at which the goods were sold to the distributor as the sole consideration for sale in later years. Given the time elapsed since the original order, the Court decided that no purpose would be served by further inquiry into the shareholdings and management control of the companies.Conclusion:The Supreme Court allowed the appeals and set aside the judgment of the Appellate Tribunal, concluding that no further effect should be given to the Tribunal's directions. The Court emphasized that the determination of related person status requires a detailed factual inquiry into the shareholdings and management control, which was not sufficiently addressed in this case. The Court also considered the subsequent treatment by the authorities, which did not treat the distributor as a related person, as a relevant factor in its decision.